Textile Sector - Back from the brink:

Textile Sector - Back from the brink:

 

Happier Times may just be around the corner for textile stocks. The sector, which for long had been written off by the market punters, is buzzing on the bourses these days. This is largely on account of the interest that that is being shown in the sector by a few private equity (PE) firms, led by big daddy Blackstone. Given the heightened interest, IG decided this is a good time to revisit the long- forgotten sector.

 

From laggard to performer:

 

The textile sector has been underperforming the broad market for quite sometime now. The recent activity in textile scrips, however, serves as an indicator of the revival of interest in this sector. Over the past month or so, four or five most actively traded textile stocks have appreciated significantly. Moreover, half these scrips gained 10% or more during this period. In fact, two months ago, the number of textile companies earning such returns was only 15% vis-à-vis almost 50% now. From laggard

 

Interest shown by large PE firms:

 

Much of the action in textile stocks has been triggered by Blackstone's decision to acquire Gokaldas Exports. According to one line of thinking, if Blackstone sees, value then there is a good chance that it sees something that others are missing out. The gains, though, are not immediate, as many believe that the additional capacity for some of the leading textile players will kick off only over the next 2-3 years. But they also point out the very fact that so much capacity addition is taking place means that the demand scenario for the industry is firm.

 

Increasing demand from global as well as domestic market:

 

The sector is also buoyant on account of a demand pull, both from global as well as from domestic markets. Textile manufacturing in developed countries is on the decline following the emergence of low-cost manufacturing base in countries including India. China, India, Bangladesh and Indonesia have also seen a two to three-fold rise in textile exports to the US, the biggest textile market in the world.

 

On the domestic front, the retail boom offers great opportunity for textile companies in both garments and home textile segments. The heavy import duties on fabric and apparels ranging from 20-60% provide a fair degree of protection to domestic textile manufacturers. With domestic consumption also on the rise, Indian textile companies are adding capacities across various segments including yarn, fabric, garment and processing.

 

Challenges ahead:

 

However, the journey may not be completely smooth. The biggest challenge for the domestic textile sector will be trying to cope with the increasing competition from other low cost countries. Furthermore, the appreciation rupee may caste a shadow on margins.

 

The risk is mitigated to a certain extent as textile companies can claim a 3% drawback on free on board (FoB) value of exports under a special government scheme.

 

Bright future prospects:

 

Given the future prospects and the fact that big foreign institutions are so bullish on the sector, investors with a long term view can consider textile companies, which can take advantage of economies of scale and are fully integrated.